PAR Says Fortify Financial Oversight

October 5, 2005

Immediately deploying the resources of the offices of the Legislative Auditor, Inspector General, State Treasurer and Department of Revenue to coordinate and monitor federal disaster assistance to Louisiana was an appropriate response to meet the state’s emergency financial oversight needs. But, a more comprehensive oversight plan with independent components and additional contracting restrictions and requirements should now be developed to assure the nation that Louisiana can and will be a trustworthy steward of the billions of federal dollars headed its way.

As soon as Federal Emergency Management Agency (FEMA) funds began flowing into Louisiana, a variety of proposals to prevent fraud and waste began to circulate, as did allegations of early misspending and abuse. The recommended oversight commissions and contracting rules were offered as tools to counter Louisiana’s persistent reputation for tolerating corruption. Some called for monitoring at the federal level and others at the state level. Both are in order, and both have been established — to some degree. Louisiana should, however, go further by providing for more independent oversight, a more transparent process and more restrictions on who can get contracts.

Thorough and independent oversight on the front and back ends of spending is necessary to protect the public coffers, but the state should place primary emphasis on fortifying its front-end oversight and documentation capabilities. The governor is in the process of hiring a national accounting firm to oversee the receipt and disbursement of FEMA funds. The system of internal controls and pre-audit reports the selected firm will provide is an essential independent oversight mechanism. However, the firm should be made responsible for oversight of all federal recovery funds, including those appropriated directly to Louisiana by Congress, bypassing FEMA.

The state has so far only received disaster assistance from FEMA, but direct appropriations are soon to follow. The amounts of aid granted to Louisiana by Congress will depend on members’ faith in the rigor of Louisiana’s plan to oversee spending that may be ten times the size of the state’s annual budget.

The state should also hire a separate independent entity (or expand the scope of the accounting firm) to perform background checks on all contractors and sub-contractors. Investigations should verify business owners and identify any lawsuits and liens against the companies. New York’s financial oversight plan during its post-9/11 recovery employed third-party administrators to investigate contractors and to coordinate and expedite disaster assistance payments. Some large contractors were also required to have Independent Private Sector Inspectors General (IPSIGs) embedded in their companies to provide additional oversight. Both types of independent oversight are reported to be effectively preventative and should be considered for inclusion in the state’s arsenal of oversight mechanisms.

PAR continues to recommend that the Office of the State Inspector General (IG) be beefed up with an expanded staff, statutory authority and additional autonomy. The IG, established only by executive order, is now subject to the whims and wishes of any future governor. Also, the governor can quash or censor any IG report without explanation. The statute should ensure that there are no limits on what can be investigated or what findings can be released. The Legislation should include provisions that protect the IG from removal from office for purely political reasons. And, sufficient funding should be provided to support a full staff and a public outreach function to enhance the office’s deterrent effect.

PAR has long recommended that elected officials and their family members should be prohibited from receiving public contracts, whether competitively bid or not. This prohibition should apply to state and local elected and appointed officials and their immediate family members with a 5% or greater stake in the company seeking contracts with state and local governments. The prohibition should also apply to sub-contractors, because the potential for circumventing the law would be too great otherwise.

Enacting this prohibition should be one of the main priorities of the Legislature in the upcoming special session. Accordingly, companies seeking public contracts should be required to identify all individuals with a 5% or greater ownership interest in the company. A registry of all eligible contractors and sub-contractors should be developed and made easily accessible to the public.

The extraordinary circumstances in which Louisiana will be entrusted with unprecedented relief aid call for extraordinary contracting requirements. All recovery contracts valued at or above $10,000 should be awarded in an open meeting. Certain state and local public bodies will have to meet more frequently to ensure that this requirement does not add undue delay. Additionally, any effort to expand government’s use of the no-bid provisions should be rejected.

To ensure maximum transparency, a single Web site should be developed to give the public full access to current information on all public recovery funding granted and distributed. The site should detail the source and use of all recovery funds, enabling the public to track dollars from the federal level to the sub-contractor level. Public bid process information should be provided on this site, including selection criteria, the entities awarding contracts and the individuals with an ownership interest in the applicant companies. Further, the progress of each recovery project should be reported.

In summary, PAR recommends the following:

Establish an independent, financial oversight entity with broad authority to set internal spending controls, monitor the receipt and disbursement of federal funds, manage documentation and conduct background checks on contractors for all projects paid for with federal recovery funds.

Establish by statute and expand the capacity and autonomy of the Office of the State Inspector General.

Prohibit elected and appointed officials and their family members from receiving state and local contracts and sub-contracts.

Require contractors and sub-contractors to disclose all individuals with an ownership interest in their companies. Develop a publicly accessible registry of all contractors and sub-contractors.

Award in open meetings all public contracts valued at or above $10,000.

Reject any effort to expand the government’s use of provisions allowing no-bid contracts.

Develop a user-friendly, publicly accessible Web site detailing current information on all recovery spending to include funding trail, selection criteria for contracts, entities awarding and receiving contracts and project progress updates.

Many are suspicious of Louisiana’s capacity to ethically, efficiently and effectively spend billions in this time of crisis, but with proper controls set in place early the state can do this right. This is an opportunity for Louisiana to overcome its reputation for corruption. There is also a risk that the state will be left with financial liabilities resulting from misspending, poor documentation and a cost share, which may be required for certain FEMA reimbursements. In an abundance of caution the state should impose robust independent oversight mechanisms, strict contracting prohibitions and effective means to establish a transparent process.